- The sudden announcement by the Japanese Central Bank of the shift towards the first steps of tightening contributed to the Japanese yen achieving record gains against all other major currencies.
- In the case of the USD/JPY currency pair, it fell from the resistance level of 137.47 to the support level of 130.56 in one trading session.
- This is the worst daily performance of the currency pair throughout the year 2022.
The Bank of Japan widened caps for the record government bond yield, a surprise move that sent bond yields higher globally and sent stocks lower in Asia. In a widely unexpected and surprising plan, the Bank of Japan said on Tuesday it would allow the yield curve on 10-year Japanese government bonds to range between 50 basis points on either side of its 0% target, up from the previous maximum of 25 basis points.
The Bank of Japan did not mention inflation in its policy statement, but said the shift aims to "improve market performance and encourage smoother shaping of the entire yield curve while maintaining accommodative financial conditions." Japan was reluctant among the major industrial countries to allow returns to rise. Countries in Europe and the United States aggressively raised interest rates to fight inflation. The BoJ introduced the previous caps for yield curve control in September 2016, hoping to lift inflation close to its 2% target after a prolonged period of economic malaise and stagnant inflation. Because of slow economic growth, the government primarily used spending to combat inflation rather than raise interest rates.
Earlier this month, Japan's parliament approved a massive 29 trillion yen ($206 billion) supplementary budget aimed at countering the hit to household finances from rising food and utility costs and a weak yen. In reaction to the announcement, bond yields rose globally, but stocks in Asia immediately fell.
Japan's Nikkei 225 closed down at 2.5%.
USD/JPY Forecast
There is no doubt that yesterday's move strongly contributed to turning the general trend of the USD/JPY currency pair into a bearish one. This collapse was sufficient and strong to move all technical indicators, without exception, to strong oversold levels. Therefore, forex traders may consider taking advantage of the collapse to start thinking about buying. The 130.00 and 128.60 support levels will be the most appropriate to think about.
I still prefer to buy the USD/JPY from every downward level, as the divergence in the future of tightening monetary policy by central banks and economic performance will eventually be in favor of the US dollar. According to the performance on the daily chart, a return to the vicinity of the resistance 137.50 will be important for the bulls to regain control. Today, the currency pair will be affected by the change in the policy of the Japanese Central Bank and the reading of US consumer confidence.
Ready to trade our Forex daily analysis and predictions? Here are the best Forex brokers to choose from.